Pages

Tuesday, 27 November 2012

Marx provided a great critique into the capitalist system and in this post I want to explore his ideas relating to alienation and commodity fetishism.

Capitalism at a glance...

Capitalism was founded upon classical economic thought such as those of Smith and Ricardo.

One could argue that the building block was Smith’s theory of division of labour and specialisation which was later extended by Ricardo to his theory of Comparative Advantage.

Smith argued that to develop the “division of labour” must take place because this increases productivity. By this he meant that as workers specialise in one particular part of the production process, they are able to produce more and if workers collaborate in specialising them the productivity of goods will increase and development will be in process.

Do Note: Smith was aware of the negative social implications this could have in society as if he predicted the existence of Marxist “Alienation” theory.

Marx

Before defining the notion of Alienation and Commodity Fetishism, we need to set out a few points.

For Marx the whole organisation of society changed in capitalism.

In the old Feudal system, the economy was run (as seen below):

C -> M -> C

But what does this mean? This means that workers would produce a commodity such as tomatoes (remember as this society didn’t have full division of labour employed), they would use some of their production for subsistence and they rest would be sold for money (M). This money would be used in exchange for other goods such as apples which the worker may not be producing. The implication of this is that the price of commodities arises out of the time and value of labour used in the production.

However, in the capitalist system this has changed to:

M -> C -> M’

What does this mean? In the capitalist system, we start with the premise that there are two classes of people which are continually diverging: the bourgeoisie and the proletariat's. The bourgeoisie are the capitalist class they have money [M] (either through getting a loan or previous economic activity) and they use this money to employ labour (the proletariats) and means of production and produce commodities, C. These commodities are then put on the market and are sold separate from the labour and the production process that was used to make them. Given the distance of the production process and that now workers need to use their wages to buy everything (as they own nothing that they make) prices are determined exogenous to the production process and the outcome results in a larger some of money produced for the capitalist who instigated the production process in the first place.

So what do we learn from this? The first critique Marx has for the capitalist system is alienation.

Alienation

For Marx, the capitalist system led to the worker being alienated. Social relations become estranged in such a society because the worker works for subsistence (as he can no longer on his own compete with capitalist productivity) and this subsistence derives it existence from the exchange of labour for a wage. We can summarise that the worker becomes alienated for three reasons:

The workers do not own the means of production - so even if they wanted to make the product for themselves, they would have to buy it as they simply do not have the money required to own the means of production - even their own labour is now separate to them - it is a commodity (leads to second point).

Workers do not own the product of their activity.

Workers do not control the organisation of productivity process - they merely carry out specific roles.

Alienation is crucial for Marxian thought because you can see this one of the reasons that has the potential to leads to such high levels of tensions that would eventually cause a revolution and lead us into the new era of socialism (although what that is we do not know - we just know workers would not be alienated).

Commodity Fetishism

What is commodity fetishism? and how does it link to all we are talking about?

So we have already established in a capitalist society all relations are economic not social such as employer-employee. Workers are compelled to sell their labour to have some kind of subsistence in this new society.

Commodity Fetishism refers to economists obsession with commodity. The transformation social relations into objectified economic relations because of this obsession.Commodity fetishism is blinding because now products derive their value on what people perceive the product to be worth not their real economic worth which includes the labour that has gone into them. This value is no longer equivalent to the price - price derives itself from contingent factors whereas value by fetishism of commodities.

The ultimate aim of the whole production and exchange process is to own exchanged values (and these values aren’t real because of commodity fetishism). Furthermore, the capitalist society is now characterised by social stratification - the workers and the capitalist and controlled by one class implying the exploitation of one class over the other. Here you can see exploitation could include alienation that capitalism causes.

The obscures the notion of division of labour in a way, because there isn’t that collaboration between workers. Yes workers do specialise but for a wage which is used for subsistence - again showing the estrangement of social relation by some objective economic relations.

Conclusion

The post boils down to Marx’s philosophical and economic ideas that the capitalist society which is characterised by the process of M -> C -> M’( money used to produce commodities which are sold to create a profit). This leads to the alienation of workers which is crucial for eventually spurring a revolution and moving into the Socialist realm of society. Furthermore, it is important to recognise that the capitalist system is essentially based on a lie - products derive their values from what people perceive to be their value not their real labour or exchange value. This turns what were social relations to objective economic relations and this transformation he terms commodity fetishism.

Tuesday, 20 November 2012

Law of Obligations I: Express & Implied Terms Please note, that I have used “Question & Answer: Contract Law” by Marina Hamilton 2012 to help me put this table together.Classiﬁcation Deﬁnition Condition Fundamental term determined at the time the contract is made. Innocent party can accept the repudiatory breach, treat the contract as discharged and claim. Warranty Minor term added to the root of the contract determined at the time the contract is made. Damages only. Innominate Term Determined.Conditions, Warranties &amp; Innomiinate Terms by Komilla Chadha

Essentially comes down to offering some financial product e.g. loans, and means to invest with deposits

Intermediation services: require an act of joint consumption by the loan and deposits customers. It is contracts with the provision of services arising from differences in the characteristics of contracts entered into depositors and borrowers

Two types of intermediation: (i) ‘distributive’ or ‘brokerage’ - facilitate the transfer of ownership of existing financial assets, while doing this they supply information/specialist advice yet do not alter the characteristic of the financial asset and (ii) More often however, what is done is that the primary securities (those offered by the borrowers) is altered to the secondary securities (offered by the financial intermediary) and the way this is done is by issuing different contracts.

We can spilt the types of financial products offered in three categories:

Payment services - providing money to pay for goods/services

Consumption transfer - where firms can invest now and consumers can pay over time

Financial security - ensures the continuance of consumption and investment in the face of a change in economic circumstances, ill health, accidents etc.

2.2 Stages of Intermediation

This section look at hypothetical states to illustrate the need for financial intermediaries.

Absence of Financial Assets - Initially we need money to overcome the inefficiencies and economic costs of barter exchange. It also allows people to invest as they have previously accumulated money balances.

Direct Financing - By allowing for borrowing and lending, the constraints upon savings and investment can be more comprehensively lifted. Lenders are encouraged to save as before they could save only in 2 ways: hold on to commodity, whose liquidity and value is not certain or clear or hold onto money which has a certain monetary value yet bares no interest, so financial assets offer a middle choice. For direct financing to occur, borrowers and lenders with common interest need to meet this can either happen by accident or there will be transition cost involved. So by paying an interest rate which is acceptable they eradicate the transaction cost. Two types of problems arise when there is a separation of savings from the accumulation of wealth (i) ex ante problem of imperfect information where the lender cannot get full information of the borrowers and adverse selection where asymmetric information costs arise because of the lender’s inability to observe the attributes of the borrowers and (ii) ex poste problem which is that there is a moral hazard that many borrowers flow because of the inability of lenders

Information Services of Intermediaries - Creating a pool of data on investors and borrowers and so providing information quite easily. They can offer specialist advice to customers based on the information they have accumulated.

Portfolio Transformation Services - Where the borrowers and investors do not match in size, duration or in any other respect, intermediaries match it by ‘debt substitution’ that is the substitution of the intermediaries own liabilities for those of the ultimate borrowers. Two levels of this are: (i) contract level - the process of gathering information and monitoring teh investments is also centralized, but in addition to reducing transition costs, this substitution alters the pattern of claims and thus reduces the risk to lenders, if only by the means of the pooling process. (ii) issuing contracts to lenders which are fundamentally different to those issued to borrower, this closes the problem with the gap between lenders and borrowers and this can be done by attaining specialist information. Instead of distributing the liquidity as with the first level, here the ‘creation of liquidity’ happens and this means that where borrowers assets acquired by the intermediary are information and incentive sensitive, they are converted into liquid claims from the viewpoint of lenders.

Liquidity production: Intermediaries usually ‘impart liquidity’ and what this means is that the primary securities they attain are usually less liquid than the secondary securities they offer. Liquidity is based on the asset’s marketability, reversibility, divisibility and capital certainty. (1) Marketability realated to the ease and speed within which the value of the asset can be realised. (2) Reversibility refers to the discrpency in value between the contemporeous acquisition and realisation of an asset (3) Divisibility is reflected in the smallest unit in which transactions in the asset concerned can occur. And (4) Capital certainity is the extent to which an asset’s future value in terms of cash can be predicted at future dates. Liquidity is not real science, it is more subjective and it based on teh intermediaries perception of the asset can be defined as having high amounts of these four characteristics.

The Rationale for Intermediaries: A summary

The complete markets paradigm

Arrow-Debreu general equilibrium model, basically that AD=AS

There is basically a market failure in a situation where financial intemediaries do not exist, that is they reduce search, monitoring and transaction costs and provide savers with greater safety and financial security than they can obtain from their own portfolios without access to makrets for contingent claims.

Orginally it was understood that financial intemediaries represent the final stage in the evolution of the financial system and now the new view is that it should be seen no more than transitory phase in the evolution path to a full set of Arrow-Debreu markets.

2.3 Pooled Investment Funds

Both mutual funds, or open ended investment companies (US name), and unit trusts (UK name) are legal constructions which permit the ‘pooling of a large number of small unequal amounts of money belonging to different induviduals in a common fund to be invested by skilled managers’.

Open-ended and close-ended are both funds of pooled investment the difference is in how they both are managed. Open-ended fund issues and redeems shares on demand, whenever investors put money in or out the fund. The close-end fund is a different animal. Like a company, it issues a set number of shares in an initial public offering and they trade on an exchange.

The point of these is to create a size sufficiently large for risk diversification to operate.

The three functions of open-ended pools which allow induviduals to purchase a share of managed portfolio:

‘Brokerage’ - information is processed and collected for resale

‘Diversification’ - As the fund is large it allows risk to be diversified

‘Liquidity’ - units can be readily encashed, and open-ended funds are more liquid than direct shareholdings.

2.4 Money Market Mutual Funds

Whereas mutual funds had their origins in Britain in 19th C & were well estabilished in the US by the 1930s, money market mutual funds are of very recent origin.

The pooled funds for Money markets is placed mainly on short-term ‘prime’ paper. This paper is only issued in large denominations e.g. $1 mil minimum and without pooling the investment would clearly be beyond the resource of most induviduals. Thus the funds untertake a size intermediation , enabling induviduals to aggregate their resources in order to take advantage of the higher interest rate avaliable on large job lots.

Also very low risk and examples include: t-bills, CDs, Broker’s Call, Federal funds. Essentially what we have to remember is that money market securities are low risk and low return.

most liabilities take the form of deposits whereby gathering of funds is facilitated and the attractiveness of the liabilities enhanced, by the ability of customers to make small-scale deposits and withdrawals upon savings account with the intermediary.

No depositer has an account which could be regarded as of significant size relative to intemediary’s total deposit liability.

The asset portfolio is on average of longer maturity than the liability portfolio

The asset portfolio contains a reserve of highly liquid assets

Thos earning assets mostly consist of a large number of small claims on different households or firms which in most cases are induvidually not marketable.

They are different to mutual funds in two regards (i) the savings institutions may be able to get a spillover effect from their deposit business to their loan portfolio and (ii) in the course of monitoring the deposit business of customers, the instiutions build up a profile as to a customer’s ability to repay loans.

2.6 Insurance Institutions

Insurance companies take in funds, called premiums, invest them in securities to generate investment income, and then pay out to policy-holders.

Life Insurance

For term policies the insurer holds prepaid premiums on behalf of those insured. With whole-life policies the same principle applies, but on a larger scale. Endowment insurance policies require the insurer to manage an accumulating balance of the insured’s savings. Annuities require the insurer to manage a decumulating balance of the annuitants’ savings.

General Insurance

General insurers are in no sense savings institutions or providers of other forms of wealth accumulation. But the basis of almost all insurance is the accumulation of a fund of assets from which uncertain losses can be met.

Maturity Transformations

This relates to the function of commercial banks above which is to create liquidity and take risks upon itself (which isn’t as irrational as it sounds given that they should have less risk as they have information and specialist knowledge).

They buy assets which are long and small in size and they transform them into short-term larger securities.

The issue is still how is it logical for banks to give liquidity guarantees which don’t exist and guarantees of deposit which as with the nature of any security they use the deposit for, cannot actually exist.

Four Major concerns for bankers while profit-maximizing

Liquidity Managements : Reserves in banks earn zero interest especially as the law says there are no reserve requirements in UK or USA. So the concern is how many liquid assets such as T-bills to keep in reserves for when there is an emergency yet profit maximize as much as possible.

Asset Management: Loans are asset and default risk is absolutely crucial as banks have to make that up elsewhere because it is depositors money not their own money they use to give out loans. So the issue is how can you essentially get that idea low risk high return which doesn’t necessarily exist.

Liability Management : Liabilities are deposits and bankers are searching low cost ways to increase liabilities. They do this by offering deposit insurance to a certain extent, but again they are constantly questing are there cheaper ways to attract funds.

Capital Adaquency Management : Similar to liquidity management, where that was focused on the nature of reserves that banks keep capital adaquency questions the size question, how much capital should exist in reserves.

Trends in the realms of Banking and Finance

Merger & Acquisition - The trend that investment banks are merging with commercial banks and the motivation behind this is that the nature of mergers reduce costs thus providing incentives for shareholders to vote for it.

Executive Pay - Incentives for board members to get bonuses by getting involved with risk strategy issues and mis calculating risk as a result.

Capital Adquency Management -Banks are not keeping enough capital, in some cases they are so blinded by the risk calculation they lend 167% of capital to just one borrower. There are new regulations coming now.

Growing Competition - Competition and new ways of banking are changing the face of banking. For example the surge in internet banking and the enormous cost incentives has resulted in the closure in many bank branches, leaving the few banks remaining with merely operational staff.

Lush J’s definition of consideration is one that has been taught and used by lawyers for a substantial period of time. He describes, “a valuable consideration, in the sense of law, may consist in some right, interest, profit or benefit accruing to the one party or some forbearance, detriment, loss or responsibility given, suffered, or undertaken by another” (Currie v Misa 1875).

Consideration, like offer and acceptance is the third neccessary component for the formation of a legally binding contract as under English Law without consideration the promise is not binding. So what is consideration? and what is Lush J trying to communicate in Currie v Misa. The best way t understand this is in an example, as this is what lead to my epiphany moment! To take it simply then, if I make an offer to sell you this bottle of water for 50p, you accept this offer and say yes I will buy it. The consideration can be viewed as the transition of the water bottle from one party to another showing that the offeror has had a detrimental effect and the offeree a benefit. This difference from the actual execution of the contract as that would include the transmission of the 50p and other terms which may be present in the contract.

It is important to understand the notion of ‘past consideration’ as that thus shows that for each legally binding contract that is formed a specific consideration is required, as an interest or forbearance of the past is unjust. It is one that allows a party to benefit without incurring any legal liabilities. Of course, with any such clear rule in law there as exceptions such as if the offeror has requested that a past consideration should be given.

So what are some of the crucial rules associated with consideration...

‘Consideration must move from the promise’ - This again links to the notion that consideration is making a bare or gracious promise into a more sophisticated legal contract. If the act cannot demonstrate this shift, it fails to be classified as consideration.

‘Consideration need not be adequate’ - so consideration doesn’t need to be adequate i.e. fair or valuable, it can be anything which has value in the eyes of the law, e.g. chewing gum wrappers in Haelan Laboeratories Inc v Topps Chewing Gum Inc

‘Motive is not the same as consideration’ - Although intention and consideration play a great role in making a promise or an agreement legally binding, it must be understood they are not the same. Intention refers to the parties intention to enter into a formalistic legal contract where is consderation is the forebearrance or the interest gained by entering into such an agreement.